CapitalOne

Middle-market companies—those with annual revenues of between $100 million and $3 billion—collectively play an outsized role in the U.S. economy. According to U.S. Census Bureau data, the 20,000 companies that fall within this range account for a third of all revenue generated by U.S. companies and employ over 30 million people. The future of the economy depends, in part, on what the executives of these companies are thinking and planning.

To find out, Capital One commissioned a survey of 400 senior executives from a broad range of sectors, covering everything from commercial real estate and financial services to technology, telecom, and information technology.[1] We identified a number of key issues these executives face as they map out their growth strategies. The findings shed light on the intentions of middle-market companies, as well as limitations they feel might impact their ability to realize those goals.

While the Appetite for M&A Remains Strong, Middle-Market Executives Seek Greater Understanding of Other Growth Options Middle-market companies have entered 2018 with expansion on their minds—61 percent identified mergers and acquisitions (M&A) as the top growth opportunity for their company. One indicator of industry sentiment, the RSM U.S. Middle Market Business Index (MMBI), posted a new high of 132.2 at the end of the 2017.[2] RSM expects M&A activity among middle-market companies to remain solid in 2018.

The rationale for middle-market M&A activity this year is captured in a cluster of responses that executives gave about the sources of growth they intend to pursue. Entering new geographic markets (42 percent), entering new market segments (40 percent), and launching or acquiring new products and services (37 percent) are all goals that can be accelerated through M&A, as is a fourth goal, increased productivity (43 percent).

However, a surprising number of executives are not confident in their knowledge about these growth areas. They identified the same choices – entering geographic markets (45 percent), entering new market segments (43 percent), and launching or acquiring new products and services (42 percent) as areas in where they felt they would benefit from additional knowledge.

Middle-Market Companies Worry about Talent, Competition, and DisruptionThe Capital One study found that middle-market executives also want additional insights into effective management. More than half of those surveyed (56 percent) chose management skills as the growth-related area where they would most like to increase their knowledge. This reflects an awareness of just how difficult it is to navigate today’s dynamic and complex business environment.

Similarly, more than a third (36 percent) also sought more information about how to attract and retain top talent. In an expanding economy with low unemployment, strong employees – especially managers – have an abundance of options.

We also asked middle-market executives about the obstacles to growth they’d like to understand further, and 46 percent identified disruption as their top concern. This coincides with the findings of Capital One’s Disruption in the Middle Market 2017 study, which concluded that only one-sixth of middle-market companies feel quite or extremely prepared to deal with a disruptive event. They are right to be concerned. Our disruption study found that fifteen percent of middle-market companies have already faced a disruption that had a material impact on their finances, and an additional 73 percent expect to experience a disruption by 2020.

Finally, middle-market executives would also like to know more about the factors driving competition, foreign (39 percent) as well as domestic (36 percent). The large amount of capital pouring into the middle market could be the cause. According to Pitchbook, private equity firms invested $233 billion in U.S. middle market companies during the first three quarters of 2017, with a particular focus on companies with valuations between $500 million and $1 billion.

Middle-Market Executives Are Embracing Technology to Inform Decision Making and Cut CostsMiddle-market companies are increasingly turning to technology to address some of the issues they face. When asked about planned technology investments over the next two years, respondents most frequently mentioned mobile apps (47 percent). Some industries are developing mobile apps for consumer use, but executives in virtually every industry see potential in mobile apps to also enhance internal communication and promote real-time decision making.

Middle-market executives are also turning to big data as a tool to generate intelligence for decision-making and insights for streamlining operations. Forty-five percent plan to invest in data analytics over the next two years, but it appears that they have only begun to explore its potential. In addition, 30 percent expect to invest in artificial intelligence, and it will be fascinating to see how AI and data analytics combine to transform the marketplace. Cloud computing was the most frequently-mentioned choice (42 percent) for technologies about which executives are interested in learning more, as they are eager to explore the long-term cost-saving advantages that cloud computing can offer.

We were surprised to find that many middle-market executives also expressed a fascination with virtual reality; 39 percent of the respondents said they wanted to know more about the technology. According to research from market intelligence firm Tractica, the market for enterprise VR hardware and content will grow from $592.3 million in 2016 to $9.2 billion by 2021, with business applications including training and simulation, education, virtual prototyping/3D modelling, attractions, and medical therapy.

Overall, the Capital One survey showed middle-market executives to be ambitious, inquisitive, and not at all complacent. The middle market is a dynamic segment of the economy, intent on growth, but, as middle market executives are aware, this growth is dependent on securing the best knowledge, people, and technology.